CA Kanhaiya Kumar Agarwal
Brief Facts of the Case and Question of Law:
The assessee is a partnership firm vide partnership deed dated 01st April 1994. It was formed for carrying on business of ‘tea blending and packaging’ and also acting as business importer, exporter, supplier and commission agent. No significant activities were done in the assessee firm up to AY 1998-99, thus the firm gave space in its godowns on rent to various parties.
The original deed was amended vide supplementary partnership deed dated 01st April 1998, to carry on letting out of godown space on rental basis and to act as importer and exporter, supplier, commission agent etc.
The assessee has shown all along such rental charges as ‘Profits and Gains from Business or Profession’ since 1999-2000. However, for the first time while passing assessment order for A.Y 2003-04, the AO took a view that such rental charges should have been treated as ‘Income from House property’ instead of ‘Profits and Gains from business and profession’ and accordingly reopened proceeding for other years u/s 148.
Question of Law
Whether rental income of the assessee is taxable under ‘Profits and Gains from business and profession’ or ‘Income from House property’.
Contention of the Assessee
The assessee was not satisfied with the treatment of Rental Income as Income from House Property.
The assessee contended that the main business of the appellant firm was tea blending and packaging for which trade license was obtained. As the firm was not getting business in the initial years, it gave space in its godowns on rent to various parties. Thus, the assets which were let out were the commercial assets and the rent was earned to exploit them during lull in business. It was also informed that subsequently the appellant had carried out tea blending activity, income from which was shown in the return from A.Y. 2006-07. It was claimed by the assessee, that it was carrying out its business operation by way of giving godown space to tenants. It was also stated that it was not a pure rental income and various services were also rendered to the tenants.
The ld. Counsel for the assessee on merits argued that the assessee took the land on lease and constructed warehouse with an intention of exploiting the asset on commercial basis and sub-letting the same. The assessee had provided various services like security charges, electricity charges, truck parking, place for truck drivers halt etc.
Contention of the Revenue
The Revenue was of the contention that it was clear from the replies to the notice u/s 133(6) given by various tenants that they had paid simple rent to the assessee and no services were provided. The TDS form issued by them also described the payment as ‘rent’ only. It was also observed by the assessing officer that the assessee firm was not carrying out any business and only receipts credited in the P & L were on account of rent. Majority of the tenancy agreements signed by the appellant were for a fairly long period of tenancy like six, eight, nine or ten years. The terms and condition of the agreements did not state that the appellant shall provide any specialized service to the tenants. Rather, the agreements appear to be for simple letting out of property without any add on services.
It was also contended that the business of tea blending had admittedly not commenced till the end of the year under consideration. It commenced only in the financial year 2005-06.
In the original partnership deed (before being amended subsequently), it is seen that the business activity mentioned therein is ‘tea blending and packaging’ and not constructing and letting out of godowns. The same is the position in respect of the original trade license obtained by the appellant. The original license was for ‘tea blending & packaging’, which was amended to tea blending, packaging & warehousing’ during FY 2006-07 only i.e after the end of the year under consideration. Thus prima facie it cannot be said that the appellant was in the business of commercially constructing, developing and letting of property. Furthermore, even if for the sake of argument it is accepted that the appellant was engaged in such business, then also the income earned has to be taxed under the appropriate head.
Held by ITAT
It is evident from records that the main objects of the partnership firm was inter-alia renting the warehouse, which was constructed on leasehold land. The assessee firm started exploiting the property for business purposes by letting out the same on composite rental basis. Besides this, property was not at all a dwelling unit and it could be used only for warehouse. It was constructed with asbestos sheet. Thus, it could not be technically treated as house. The assessee firm also providing other facilities like security charges, electricity charges, truck parking, place for truck drivers halt etc. There existed only one single entrance to the warehouse and keys of such entrance gate was lying in the custody of the assessee. The assessee has shown all along such rental charges as ‘Profits and Gains from Business or Profession’ since 1999-2000.
In the present case, the assessee was neither absolute owner nor had surplus capital. It was providing complex services. The assessee being partnership firm was having warehousing business and local trade license authorities have accepted the assessee’s firms business to carry out warehousing business. To do so the assessee took a land on lease, which proves the intention of commercial expediency by the assessee.
Accordingly, the Hon’ble ITAT hold that income of the assessee should be assessed under the head ‘Business or Profession’”.